Monday, September 28, 2015

No less than three FOMC speakers yesterday | … but you still pays your money and you still takes your choice

Something is
definitely afoot at the Federal Open Market Committee (FOMC) in the US, the
body that has the responsibility to raise or not raise interest rates in what
is still the world’s largest economy. Last week we had the chair of the Fed,
Janet Yellen, letting us know that in her assessment rates will indeed start to
rise before the end of 2015.

It would now
appear that the management of expectations has begun in earnest, because no less
than three members of the committee were on stage yesterday, at various venues,
to give us their opinions on the state of the economy and how it might impact
monetary policy. They were Fed Evans (Chicago), Fed Williams (San Francisco)
and Fed Dudley (New York).

In various
ways, they also promoted the idea that a raising cycle is now due sooner rather
than later, even if it would seem that there is not yet absolute consensus on
the matter.

You pays your money and you takes
your choice

Charles Evans
actually sees a substantial cost to a ‘premature rate liftoff’ and he
represents a considerable contrarian view to the other FOMC members we have
heard from, including Yellen. The case for starting to raise rates around now
is that to do so will forestall rising inflation which, for those who are old
enough to remember when rapidly rising prices were the order of the day, can
quickly get out of hand and become rampant. Evens is not afraid of this. He
said yesterday that there he does not see ‘inflation headwinds easing until
mid-2016’, and in any event would not be worried to see the Consumer Price
Index (CPI) ‘moderately overshooting 2%’.

The other
two speakers yesterday appear to follow what is now the more orthodox line.
Williams sees monetary policy in the US ‘beginning to normalise this year’,
while Dudley said that the Fed remains on track for a likely rate rise this
year, and that the US could reach its inflation target next year.